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China’s securities regulator released draft rules last month that would increase its oversight of algorithmic trading, following a $5 trillion stock market rout allegedly caused by trading strategies. Photo: Reuters
China’s securities regulator released draft rules last month that would increase its oversight of algorithmic trading, following a $5 trillion stock market rout allegedly caused by trading strategies. Photo: Reuters

Funds, banks targeted as China intensifies financial crackdown

Probe on insider trading in China has led to the arrests of top executives from banks and hedge funds

Beijing/Shanghai: China’s crackdown on its financial industry is intensifying as authorities probe strategies blamed for exacerbating a $5 trillion stock market rout.

Shanghai police raided hedge fund Zexi Investment on Sunday, according to a person familiar with the matter. General manager Xu Xiang was detained, the official Xinhua news agency reported. Executives at Yishidun International Trading and Huaxin Futures were arrested, Xinhua said in a separate report.

Adding to evidence that a clampdown on the financial industry is spreading, Agricultural Bank of China Ltd president Zhang Yun was taken away to assist authorities with an investigation, people familiar with the matter said on Monday.

The Communist Party’s Central Commission for Discipline Inspection is carrying out its first broad checks on the finance industry since President Xi Jinping became the party’s head in late 2012. The summer’s stock market rout in China has triggered investigations that have snared executives from the country’s biggest securities firm as well as a fund managers and a top regulatory official.

Xu, who founded the top-performing hedge fund firm Zexi, was detained on charges including insider trading and stock manipulation, Xinhua reported.

Two executives at Jiangsu-based Yishidun International Trading and the technical director at Shanghai-based Huaxin Futures were arrested after a police investigation showed they made 2 billion yuan ($316 million) in “illegal profit", Xinhua reported separately, citing the ministry of public security.

Sina.com reported earlier on Monday that Agricultural Bank’s Zhang had been taken away and didn’t attend a disciplinary committee meeting. Assisting with an investigation doesn’t mean Zhang is accused of wrongdoing.

Calls made to Zexu’s office went unanswered, as did calls to Huaxin. Yishidun’s phone number isn’t registered, according to public records searches. A press officer at Agricultural Bank, China’s fourth-largest lender by market value, declined to comment.

Highlighting the tense environment sparked by the probes, Chinese social media was set abuzz on Monday morning by a false report of a man associated with the insider trading probe who was shot and killed by police while trying to escape apprehension.

China’s securities regulator released draft rules last month that would increase its oversight of algorithmic trading. Those who use automated orders to buy and sell stocks would need to report certain information and wait for a review before they are allowed to execute their strategies.

Orders shouldn’t originate from offshore computers or domestic systems that are controlled from overseas, according to the China Securities Regulatory Commission’s proposal.

Authorities are targeting futures because selling the contracts is one of the easiest ways for investors to make large wagers against stocks. It’s also a favoured product for short-term speculators as the exchange allows participants to buy and sell the same contract in a single day.

Yet futures are also a popular tool among sophisticated investors with longer-term horizons.

For hedge funds, they provide an easy way to adjust exposure to market swings. And large institutions use them to make cost-effective asset-allocation changes. Bloomberg

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